IRS Sued for Millions Over Employee Retention Credit (ERC) Delays
The pandemic-era tax refunds for businesses have been a contention point for the agency, now employers are fighting for their cash.


Lawsuits are descending upon the IRS over tax refunds related to the Employee Retention Credit, and this could just be the beginning.
For example, an industrial staffing company in Ohio, forced to suspend hiring events due to government shutdowns, is seeking over $5 million in tax refunds related to the ERC, a complaint filed last month said. Also, a North Carolina-based daycare filed suit against the IRS, asking for more than $394,000 in owed refunds.
These and other legal complaints come as the tax agency attempts to dig itself out of a massive backlog dating back to the pandemic over erroneous ERC claims. Some employers faced delays in claims processing for years, and now several thousand are receiving a notice of claim disallowance.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Furthermore, the IRS admitted some rejection letters were wrong after businesses clawed back in an appeal.
However, recently, the tax agency announced progress in clearing its ERC backlog. Processing is underway on approximately 400,000 claims, which represent about $10 billion.
“The IRS understands the vital importance of Employee Retention Credits payments for struggling small businesses, and we are continuing to make important progress on one of the most complex tax administration provisions we've ever had,” IRS Commissioner Danny Werfel said in a statement.
Still, here’s why some employers are going to court over ERC refunds.
IRS overwhelmed by ERC claims
The ERC is a refundable tax credit created to incentivize businesses to keep their employees on payroll during COVID-related business shutdowns. As previously reported by Kiplinger, abusive promoters advertised the ability to claim the ERC to unsuspecting employers, leading to a surplus of errors and ERC fraud.
The IRS has had its fair share of challenges handling ERC claims. At one point, the National Taxpayer Advocate reported that the pileup had grown to about 1.4 million.
It’s been about a month since the IRS restarted processing claims following a one-year pause, and the agency is even urging employers to participate in its Voluntary Disclosure Program to fix ERC claims at a discount.
Despite these strides, many employers waiting on claims are not happy. Some say they haven’t even had the courtesy of receiving an explanation or notice of disallowance explaining the delays.
IRS faces million-dollar ERC lawsuit in Ohio
An Ohio-based industrial staffing company is suing for $5.1 million in refunds linked to pandemic-era ERC claims.
The complaint filed in September argues that The Job Center LLC, a limited liability company, is entitled to retention credits for five quarters from 2020 to 2021 under the “government shutdown” provision.
Furthermore, the plaintiff states that due to the COVID-19 pandemic, the business was forced to suspend or modify regular operations to comply with state, local, and federal-issued orders.
This impacted travel, group meetings, hiring events, and commerce across its locations in Ohio, Kentucky, Indiana, Pennsylvania, New Hampshire, Missouri, Georgia, North Carolina, Texas, and Arizona, according to the filing.
Even though the company filed a refund request on June 20, 2023, the complaint alleges the IRS failed to justify the delays or issue any notices of disallowance, audit, or deficiency for the claims.
Due to the inaction, The Job Center LLC is asking the IRS to pay the owed credits and award the company interest and attorney fees.
North Carolina daycare claims it was unjustly denied ERC
In a similar move, a North Carolina daycare center filed a lawsuit against the IRS for more than $394,000 in owed employee retention credits, plus interest.
The complaint argues that Miss Marta’s Inc., which operates as The Learning Tree, qualifies for the ERC under the “gross receipts” provision of the CARES Act, as the company suffered a decline in gross receipts for six quarters from 2020-2021.
The Learning Tree also alleges that it filed amended returns to claim the ERC on time. Still, despite doing so, its claim was disallowed after the moratorium period without review to justify the decision.
“After a lengthy delay, the IRS has failed to process The Learning Tree’s claim for an ERC refund,” the complaint says. “The IRS has delayed processing ERC claims to such an extent that it has effectively suspended the program.”
IRS responds to legal challenges
The aforementioned complaints add to a laundry list of lawsuits contending that the IRS failed to issue an ERC refund.
For instance, an Arizona-based tax advisory and tech firm sued the agency alleging that the moratorium period on ERC claims was “unlawful.”
IRS Deputy Commissioner Douglas O’Donnell made a declaration justifying the ERC processing delays, which included:
- The agency received an “unprecedented surge” in claims and a significant share were ineligible
- Many ERC claims were “complex” and required a manual review from an IRS employee
- The IRS had to add resources to “address the unusually high volume of claims”
Should you file a tax refund lawsuit against the IRS?
Before filing a tax refund suit, you must first claim for refund or credit with the IRS using Form 941-X. Furthermore, a refund lawsuit cannot “be begun before the expiration of 6 months from the date of filing the claim” unless the IRS denies the claim — then you can proceed immediately.
It’s worth mentioning that if you receive a notice of disallowance, you’ll have 30 days to dispute the decision to protect your two-year timeline to request an appeal or file a suit.
Related
- Incorrect ERC? IRS Point to Five Red Flags
- Non-Refundable vs. Refundable Tax Credits: What’s the Difference?
- IRS Restarts Processing of Some ERC Refunds
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Gabriella Cruz-Martínez is a finance journalist with 8 years of experience covering consumer debt, economic policy, and tax.
Gabriella’s work has also appeared in Yahoo Finance, Money Magazine, The Hyde Park Herald, and the Journal Gazette & Times-Courier.
As a reporter and journalist, she enjoys writing stories that empower people from diverse backgrounds about their finances, no matter their stage in life.
-
Don't Miss Out! A Quiz on Medicare Enrollment Deadlines
Quiz Test your basic knowledge of Medicare enrollment periods in our quick quiz.
-
IRS Updates 2026 Tax Deduction for People Age 65 and Older
Tax Changes Adjustments to the extra standard deduction can impact the tax bills of millions of older adults. Here are some new amounts to know for 2026.
-
IRS Updates 2026 Tax Deduction for People Age 65 and Older
Tax Changes Adjustments to the extra standard deduction can impact the tax bills of millions of older adults. Here are some new amounts to know for 2026.
-
Family Tax Credits 2026: New IRS Changes That Can Save You Money
Tax Credits While the child tax credit remains the same, other family tax credits are higher for 2026, including the earned income tax credit and other inflation-adjusted amounts. Here's what they're worth now.
-
Your 401(k) Can Now Include Alternative Assets, But Should It? A Financial Adviser Weighs In
Many employer-sponsored plans offer limited investment options, which can stunt growth. But participants considering alternatives might need some sound advice to get the most from their accounts.
-
Will Taxes Shred Your 401(k) or IRA During Your Retirement? It's Very Likely
Conventional wisdom dictates that you save in a 401(k) now and pay taxes later, but turning that rule on its head could leave you far better off. A financial planner explains why.
-
I'm a Real Estate Investing Pro: This 1031 Exchange Strategy Can Triple Your Cash Flow
Savvy investors can use 1031 exchanges to unlock value by moving capital across markets in a play called geographic arbitrage. These tax implications can make or break the strategy.
-
Standard Deduction 2026 Amounts Are Here
Tax Breaks What is the standard deduction for your filing status in 2026?
-
Claiming the Standard Deduction? Here Are Five Tax Breaks for Retirement in 2025
Tax Tips If you’re retired and filing taxes, these five tax credits and deductions could provide thousands in relief (if you qualify).
-
Don't Let Your Equity Compensation Trip You Up: A Financial Expert's Guide
Stock options, RSUs and other executive perks can come with some serious strings attached. To avoid a nasty tax surprise, you need a plan.